Just Taxes Blog by ITEP

Tax Credit Reforms in Build Back Better Would Benefit a Diverse Group of Families

Tax Credit Reforms in Build Back Better Would Benefit a Diverse Group of Families

November 18, 2021

Aidan Davis
Aidan Davis
Senior State Policy Analyst

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The Build Back Better plan working its way through Congress would bring transformative changes on many fronts, including to tax credits that bolster the incomes and economic security of millions of families. The version of the plan before the U.S. House of Representatives would extend temporary improvements to the Child Tax Credit (CTC) for a broad swath of families with children and would improve the Earned Income Tax Credit (EITC) for lower-income workers without children.

In total, more than one in three households would benefit from seeing either the CTC or EITC changes, initially enacted as part of the American Rescue Plan, extended into 2022. While the impact of these reforms would be most noticeable among families with low and moderate incomes, the reach of the CTC provision would extend well up the income scale. For example, the increased credit amount under consideration would only begin to phase out for married couples with income exceeding $150,000 and for single parents with income exceeding $112,500.

The benefits of these reforms would also be widely distributed among households of different races and ethnicities. Using the ITEP Model, we estimate that 32 percent of white households, 33 percent of Asian households, 40 percent of Black households, 42 percent of Hispanic households, and 49 percent of Indigenous households would receive a larger tax credit because of the bill. People from historically marginalized communities are somewhat more likely than average to benefit because lower average incomes make them more likely to qualify for the credits. Overall, however, white families make up the bulk of those who benefit (60 percent of all benefiting households).

Within all of these groups, the most meaningful impact would be among families with low and moderate incomes for whom additional tax credit dollars would be most noticeable. The CTC and EITC provisions would have a particularly profound effect on the poorest 20 percent of Americans, who all will have incomes of less than $22,000 in 2022. Taken together, the EITC and CTC changes would lift the average income of these households by more than 10 percent. In the middle of the income distribution, the provisions would lift average incomes by 1.2 percent—though families with children would see a significantly larger average benefit.

Child Tax Credit Changes in the House Build Back Better Plan

The Child Tax Credit changes are the most significant of the tax credit reforms in the Build Back Better Act, totaling more than $100 billion in annual impact at their peak. The major CTC provisions in the bill are listed below. Note that with the exception of the first two items (full refundability and eligibility for immigrant children), all these reforms would be in place only through the end of 2022. That being said, Congress will surely debate a further extension of these reforms next year.

  • Make the CTC fully refundable (permanently) so that children in lower-income families with little or no personal income tax liability can access the full credit
  • Reverse a provision (permanently) in the 2017 Trump tax law denying the CTC to 1 million immigrant children who lack Social Security Numbers
  • Boost the CTC from $2,000 to $3,600 for children younger than 6 (gradually phasing out this boost above $150,000 of income)
  • Boost the CTC from $2,000 to $3,000 for children between ages 6 and older (same phase out)
  • Increase the age of eligibility by one year to include 17-year-olds
  • Continue to pay out the CTC in monthly installments so that families do not have to wait until the next year, when they file their tax returns, to access this vital benefit

Nearly 1 in 4 households would benefit from these changes, including the vast majority of families with children. Among households that benefit from the provision, incomes would be lifted by an average of 5 percent for those in the middle 20 percent of households, and by a staggering 35 percent for those in the bottom 20 percent of households.

The significance of boosting incomes by more than a third for families with children living in the most vulnerable economic circumstances cannot be overstated. Deep poverty among children would be cut in half in 2022, just as it has been for 2021 under the temporary expansion of these programs scheduled to lapse at the end of this year. The hardship, uncertainty, and stress that come with financial insecurity take a toll on growing children and tax credits are a proven way to address that.

Overall, most of the families that would benefit from these changes to the Child Tax Credit are white (representing 60 percent of benefiting households overall). But Indigenous, Hispanic, and Black households would all be somewhat more likely than average to benefit. This is partly because the plan would reverse egregious provisions that deny the full credit to lower-income families (provisions that limit the amount of the credit that is refundable). ITEP previously estimated that close to half of all Black and Hispanic children live in families that are denied the full CTC. Making the credit fully refundable is essential to ensuring that these children are not left behind.

Earned Income Tax Credit Changes in the House Build Back Better Plan

Lower-income workers without children would also benefit from the improvements to the Earned Income Tax Credit being contemplated by Congress. Specifically, the legislation working its way through the U.S. House would extend, for one year, the following reforms that were initially enacted as part of the American Rescue Plan passed by Congress in March:

  • Eliminate a restriction that prevented younger workers without dependent children from accessing the EITC if they are below the age of 25 (that cutoff will be reduced to age 19)
  • Eliminate a restriction that prevented older workers without dependent children from accessing the EITC if they are above the age of 64
  • Bolster the size of the EITC for all workers without dependent children so that it is more comparable to the larger credits already received by workers with children
  • Allow EITC claimants the choice to use their earned income from the prior year when calculating their EITC if their income has fallen due to job loss or any other reason

For lower-income workers without children at home, the EITC typically offers very little, if any, benefit. The Build Back Better plan would enhance those meager credits to be on a level more on par with the larger credits already afforded to families with children. In some ways, the plan is playing catch-up with progress already seen at the state level: seven states have lowered their minimum eligibility age for claiming the EITC, for example.

Overall, most of the households that would benefit from these changes to the Earned Income Tax Credit are white (representing 58 percent of benefiting households overall). But Hispanic, Black, and Indigenous households would all be somewhat more likely than average to benefit.

Discrimination in the labor market, inequitable educational systems, over-policing, and countless other manifestations of systemic racism have resulted in an economy where a disproportionate share of low-wage jobs are filled by people of color. Against that backdrop, reforms to income-targeted policies such as the EITC tend to be particularly important in historically marginalized communities.

A Step Toward Better Tax Credits

The reforms to the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) contained in the U.S. House’s version of the Build Back Better plan would benefit a large and diverse group of households, and have the most dramatic effects for lower-income families facing economic insecurity and for historically marginalized communities. Ultimately, these CTC and EITC changes represent a positive step toward greater economic and racial equity and are among the most promising features of the Build Back Better plan.